Thursday, December 8, 2016

2009 B Microeconomics FRQ #3

2009 B Microeconomics FRQ #3

1st, make a chart.

(A) If Easy chooses to maintain its current fare, which strategy is better for City Wheels? Explain.

Look at your chart - If Easy maintains then City should maintain. Explain = Why? $180>$120

If Easy maintains then City has two choices, to maintain or lower the fare.
City will choose the choice with the higher payoff.
To maintain for a payoff of $180.

(B) Is there a dominant strategy for Easy Ride. Explain.

Know what a dominant strategy is.

From the Oligopoly Cheat Sheet here.

Easy does not have a dominant strategy. WHY? Easy rides best move (highest payoff) depends on City.

(C) Assume the companies must make their decisions without cooperating. What will be the daily profit for each Company.

Without cooperating/knowing the moves of the other firm we can expect both company's to try and choose the highest payoff.


(D) If the two firms were to cooperate, which strategy (maintain/lower) would each firm choose?

This problem is a bit unique in that no matter if they cooperate or don't they will choose the left upward quadrant with Easy and City maintaining the fare.

(E) Local government subsidises the fare of only a company that will lower its fare. Draw a new payoff that reflects the question. (Only the quadrants with LOWER FARE are changed.)

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